Quarterly Bulletin
Consumption Articles

How important is housing market activity for durables spending? (393k)
(by Andrew Benito and Rob Wood of the Bank’s Structural Economic Analysis Division). The links between the housing market and consumer spending have been the source of much debate. In this article we examine the evidence for a link between housing transactions and consumer spending, which could exist if households were more likely to purchase some goods and services when they move home. Using survey data from the British Household Panel Survey we find that households are two to three times more likely to purchase certain durable goods when they move home. But those households that move home are a small proportion of all households: so in aggregate a change in housing transactions seems likely to have only a moderate impact on durables spending. Estimates of the extent of the overall effect are, however, subject to considerable uncertainty. Furthermore, any such link can only affect spending in the short run and cannot influence consumer spending in the medium term.

Why house prices matter PDF in full (112k)
(By Kosuke Aoki, James Proudman and Gertjan Vlieghe of the Bank's Monetary Assessment and Strategy Division). House prices in the United Kingdom have received a great deal of attention from policy-makers and economic commentators. It is often assumed that if house prices are growing rapidly, consumption growth will be strong too. But the economic links between house prices and economic activity are complex. Houses are different from other assets for two reasons. First, people usually live in their houses and value directly the services provided by their home. So the benefit of an increase in house prices is directly offset by an increase in the opportunity cost of housing services. Second, UK houses are not widely traded internationally. So UK homeowners in aggregate cannot realise their capital gains on houses to increase consumption. All UK homeowners cannot simultaneously move out of homeownership. The gain to a last-time seller is therefore also a loss to a first-time buyer, who will usually be a UK consumer too. This contrasts with capital gains on financial assets, which can be realised in aggregate in the United Kingdom, if overseas agents are willing to buy the assets. So there is no traditional 'wealth effect' on consumption from housing in the way that we think of a wealth effect arising from a change in the value of households' financial assets.

But there are other reasons why house prices and consumption may move together. First, if consumers are optimistic about economic prospects, they are likely to increase their consumption of housing and non-housing goods alike. Second, if house price increases are accompanied by an increase in housing transactions, as they often are, these transactions may have a direct effect on consumption as people buy furniture, carpets and major appliances for their new home. Third, house prices may have a direct impact on consumption via credit market effects. Houses represent collateral for homeowners, and borrowing on a secured basis against housing collateral is generally cheaper than borrowing on an unsecured basis (via a personal loan or credit card). So an increase in house prices makes more collateral available to homeowners, which in turn may encourage them to borrow more, in the form of mortgage equity withdrawal (MEW), to finance desired levels of consumption and housing investment. The increase in house prices may be caused by a variety of shocks, including an unanticipated reduction in interest rates, which will lower the rate at which future housing services are discounted.

This article describes in detail how this credit market channel may form part of the monetary transmission mechanism. It also considers the implications for monetary policy of recent structural changes in the United Kingdom's retail financial markets. Increased competition has widened the availability of retail credit and reduced its price. In the mortgage market, there is now a wider range of products, and it has become easier for consumers to withdraw housing equity to finance consumption. Other consumer credit products are also more widely available, so that credit constraints in the United Kingdom may be lower now regardless of the level of house prices.

Saving, wealth and consumption (98k)
(by Melissa Davey of the Bank's Structural Economic Analysis Division). Since the mid-1990s the UK household saving ratio has fallen substantially, recently reaching its lowest level since the late 1980s. A key influence has been the large increase in the value of wealth, driven by rises in both equity and house prices, which is likely to have reduced households' incentive to save.

This article discusses the various forms of household saving and their determinants, and discusses the interactions between saving, wealth and consumption.

The first section of this article shows that the fall in the saving ratio has been associated with rising borrowing, including mortgage equity withdrawal, which tends to be related to increases in housing wealth. The second section looks at capital gains and losses, and how these can be considered as part of wider income and hence affect the level of saving. The third section discusses how the sources and composition of wealth gains may affect the response of consumption and saving.

Mortgage equity withdrawal and consumption
(68k)
(by Melissa Davey of the Bank's Structural Economic Analysis Division). Mortgage equity withdrawal is borrowing that is secured on the housing stock but not invested in it, so it represents additional funds available for reinvestment or to finance consumption spending. Mortgage equity withdrawal was an important source of finance in the 1980s. But it fell back sharply in the 1990s, and remained negative for much of the decade. This article discusses the motivation for and the effects of mortgage equity withdrawal, using evidence from a recent consumer survey carried out for the Bank of England and the Council of Mortgage Lenders.

The first section outlines how the Bank calculates aggregate mortgage equity withdrawal, and explains the relationship between this aggregate measure and other macroeconomic variables. The second section outlines the results of a microeconomic study of the various ways in which households can withdraw equity. The third section reports the results of a recent MORI survey, which investigates how equity is withdrawn, what it is spent on and why this method of finance was used.

The main aim of this article is to assess whether the data on bank and building society lending to private non-financial corporations (PNFCs) and households contain information that could improve our understanding of the links between monetary policy and aggregate demand.

The article demonstrates that it is possible to estimate relationships that explain lending to firms and households, and that lending is driven by the same factors that drive the more intensively researched categories of money demand, consumption and investment. The results have improved our understanding of the links between money and credit and the spending decisions of households and firms. There do appear to be significant interactions between lending to firms and households, and money, consumption and investment. The estimated system of equations potentially gives a framework that helps us to interpret the likely impact of observed credit growth on future spending. These estimates are tentative and require further empirical verification. Notwithstanding these reservations, channels that involve credit as well as money balances appear to matter for the transmission mechanism of monetary policy.